The two sides of offshore outsourcing
by Bill Catlin, Minnesota Public Radio
March 24, 2004

After 9/11 devastated the hospitality industry customers of Bloomington-based IDeaS, job cuts and shifting work to India helped save the company from oblivion. (MPR Photo/Bill Catlin)

As more companies hunt for cheaper labor in places like India and China, offshore outsourcing has become a flashpoint in the presidential campaign and in state legislatures. Outsourcing is spreading from the manufacturing sector into the service economy and affecting white-collar workers, many with higher wages and skill levels. While outsourcing often gets blamed for job losses, finding cheaper labor can also save or even create jobs.

St. Paul, Minn. —
Have you ever bought something from an online retailer because they charged less than your local store? Books, computer parts, clothes? If so, you've outsourced, in a way. You got a better price from a vendor somewhere else, and the Internet made it possible.

If you ran a company and did that with your workforce, you'd be what Democrat John Kerry calls a Benedict Arnold CEO.

You can find both sides of the outsourcing story at Integrated Decisions and Systems, a.k.a. IDeaS, a software company based in Bloomington where two employees confer on a technical issue over a game of pool. It looks like a scene from the dot-com boom, before outsourcing threatened any IT jobs. But these guys owe their jobs to outsourcing.

"Kerry would say in his rhetoric that we're a Benedict Arnold company," said Ed Booth, who runs IDeaS. He says the cost savings from moving work to India saved the company after 9/11.

IDeaS was founded by three scientists originally from India. In 1997, they set up a small operation in India, to do something for their homeland. By 9/11 there were about 50 people there, developing or maintaining the company's products, which are used in the hospitality industry. But Booth says the terrorist attacks devastated his customers.

"We were at economic ground zero, if you will, of 9/11," said Booth.

To survive, IDeaS cut more than 40 employees, about a quarter of the workforce. But none of the cuts took place in India. At the time, work done in India cost one-sixth what comparable work cost in the U.S.

This is not good for our nation, and our people and especially the middle class is going to start to disappear....- Sarah Barnes

A growing number of companies in Minnesota and elsewhere have sent work overseas in search of lower costs. India, with many educated English speakers, is a leading destination for the services sector. In the U.S. outsourcing is getting blamed for layoffs and slow job growth.

But Ed Booth says the India operation allowed his company to reduce spending, preserve cash and ultimately save jobs in Minnesota.

"If we hadn't developed a capability in India, and been able to move very quickly we'd have been out of business--just flat-out, out of business. And now we're the strongest company in our field in the world because we had that capability and we were able to survive, keeping our core capabilities there," said Booth.

IDeaS has started to hire again in the Twin Cities, but the head count in India is growing faster than it is here. Booth says health insurance costs are a major impediment to adding staff here. While sending work to India saved his company, with the sense that more higher-skill work is going overseas amid paltry U.S. job growth, Booth says he worries that outsourcing threatens the middle class.

So does Sarah Barnes.

"This is not good for our nation, and our people and especially the middle class is going to start to disappear, there will be a rich and poor and the people in the middle, too bad," said Barnes.

Barnes' husband Randy was laid off last fall from his job as IT research director for Lawson Software in St. Paul. The company also announced some work would move to India. A Lawson spokesman says the layoffs and the move to India are unrelated.

But Sarah Barnes became part of the backlash. John Kerry has criticized the Bush administration over outsourcing. Sarah Barnes found outsourcing was also a concern at her Republican caucus this month.

"The first proposal that I brought up was that companies that outsource to foreign countries be subject to penalties. It was pretty close, but it did pass. We had about a 6 to 5 vote there. And so I was glad that passed. I would like to see this gain momentum. Both parties really need to say this," said Barnes.

Praba Manivasager, co-founder of a Twin Cities consultancy that helps firms with outsourcing, says interest in finding cheaper help offshore continues to grow.

"What's happening now, though, is the mid-market companies are also looking at offshore because they have to compete with their Fortune 500 competitors. It's no longer this black magic of cost savings. It truly is becoming general practice to consider offshore as part of your strategy," says Manivasager.

One often-cited Forrester Research study indicates that strategy will send more than 3 million U.S. service industry jobs overseas by 2015. But others say that may be a lowball estimate.

"Nationwide about 14 million jobs are in job categories that could be outsourced overseas fairly easily," said economist Cynthia Kroll of the University of California, Berkeley.

Kroll has analyzed the number and kinds of service sector jobs vulnerable to outsourcing. She says the number in Minnesota approaches 300,000. Kroll says not all will necessarily go offshore.

She says jobs that are outsourced often involve little face-to-face contact with customers; the work can be done via phone and the Internet; and there's a big wage gap.

"For example a telephone operator might get $12.50 in the U.S. and less than a dollar an hour in India. A legal assistant might get $18 an hour in the U.S., and $6 to $8 an hour in India. Financial research, about $34 an hour; between $6 and $15 an hour in India," said Kroll.

Steve Hine, director of the Labor Market Information Office at the Minnesota Department of Employment and Economic Development says many IT jobs were lost simply because of the dot-com bust and the passage of Y2K. And the IT sector has started adding jobs in Minnesota. Hine says even if three million jobs head overseas by 2015, the U.S. economy is projected to add about 25 million over the same period.

"We're going to see plenty of opportunities arising, including in IT jobs, over the next 10 or 15 years, regardless of the extent to which some of those jobs may be located overseas," said Hine.

Hine says its natural for jobs to flow to lower cost areas, and that reduces the cost of products and services in the U.S.

Cynthia Kroll of Berkley agrees. She says the cost of computers fell as components were made overseas. Cheaper computers meant more people and businesses bought them, and wanted software and services.

"And that in turn has grown to big business in the U.S., so the jobs gained in those sectors far outweighed the jobs lost in manufacturing," said Kroll.

But she also says it's not clear what will replace jobs lost to outsourcing.

Still, this is hardly the first period of gloom over foreign economic threats. In the late 1970s there were accusations of unfair competition from the Japanese. In the early 1990s, NAFTA prompted Ross Perot's famous quote about the giant sucking sound of jobs heading to Mexico.

But fewer than 600,000 jobs were lost where NAFTA was a factor. The U.S. economy has created about 18 million jobs since NAFTA took effect. The once invincible Japanese economic machine is only starting to recover after being supine for years.

But that history is little comfort to people whose jobs are threatened, like mainframe computer programmer Tom Anderson of Corcoran. Like many, he says outsourcing is one reason U.S. employment has failed to rebound. At age 55 his livelihood depends on a technology that's losing popularity, and the recession left a surplus of people with his skills, compounded by outsourcing.

"I took a 10 percent pay cut a few months ago, and I don't expect that I will ever make more money than I make right now. I expect my wages to be flat over the next several years. That's if I'm lucky," said Anderson.

Anderson had a job when he spoke those words two weeks ago. He got laid off Monday.

While offshore outsourcing may be good for the economy in the long run, it's likely to be seen as a threat so long as U.S. job growth remains stagnant. And American workers may find it difficult to see the parallel between finding bargains on eBay, and CEO's trying to reduce costs.